Appeals court rules against Argentina in debt fight

A U.S. appeals court has ruled against Argentina, favoring investors in…

A U.S. appeals court has ruled against Argentina and for investors in a long-running fight over defaulted debt.

The long-anticipated ruling, handed down by the U.S. 2nd Circuit Court of Appeals in New York, said that Argentina must pay a group of holdout investors in full if it wishes to continue making bond payments to holders of other bonds it has issued.

That payment would exceed $1.3 billion, including principal and back interest. However, the court also placed a stay on the ruling to allow the U.S. Supreme Court time to decide whether it will hear an appeal on a related matter.

The dispute between the South American nation and a group of investors led by hedge funds Elliott Management and Aurelius Capital Management, has drawn wide attention in the world of international finance. Supporters of Argentina’s side, including the International Monetary Fund, worry that the ruling could make it harder for poor counties to restructure unsustainable debt loads. Many investors, meanwhile, believed that a win for Argentina would have undermined confidence in U.S. capital markets.

The decision, which upholds a District Court judge’s decision from last November, “confirms that Argentina is not above the law,” said Theodore B. Olson, lead attorney for the holdout investors.

The fight was triggered by Argentina’s record default on nearly $100 billion in bonds in late 2001. Although the country was able to exchange the vast majority of that debt with investors at a discount, a small group -- representing about 7% of the total value -- refused the swap.

Those holdout investors have since taken Argentina to court in various jurisdictions, demanding face value on their original bonds. Some have attempted creative measures to recover value, at one point convincing a judge in Ghana to temporarily seize an Argentine warship at port in a bid at extracting a ransom.

In June, Argentina filed a petition asking the U.S. Supreme Court to review a prior appeals court ruling that said the country could not continue to make debt payments to other investors without also paying holdouts. Focusing on an obscure clause in the original bond contracts, the court also held the Bank of New York Mellon to the same standard, saying that as an agent of Argentina, it was bound to pay all holders of the country’s bonds at once.

Critics of the ruling argue that it will encourage investors like Elliott and Aurelius, which are often referred to as “vulture funds,” to refuse offers to restructure debts in the future.

“Today’s ruling means that these funds will more aggressively target poor countries and struggling economies,” said Eric LeCompte, executive director of Jubilee USA Network, a faith-based nonprofit group that fights global poverty.

The high court, which is not in session, has not yet said whether it will hear the case. Last month the IMF said it would probably file a brief in support of Argentina to the Supreme Court, but later retracted that statement, saying it would wait to see whether the court took up the matter.